Dollar Rides Rates Higher, but Short-Squeeze on Bears Nearing End

Dollar Rides Rates Higher, but Short-Squeeze on Bears Nearing End

Dollar Rides Rates Higher, but Short-Squeeze on Bears Nearing End © Reuters.

By Yasin Ebrahim – The dollar was boosted by rising U.S. bond yields Monday, but data showing bearish bets against the greenback are running out of room could keep a lid on the world’s reserve currency, experts say.

The U.S. dollar index, which measures the greenback against a trade-weighted basket of six major currencies, rose by 0.15% to 92.91.

The dollar continued to ride the jump in U.S. bond yields amid ongoing expectations for an improvement in the economy, with analysts at Wells Fargo (NYSE:WFC) now expecting the 10-year yield to jump to 2% by year-end.

"There have been seven periods over the past 30-years when longer dated interest rates have climbed in a meaningful way .. but the most recent move in rates was below the average," Wells Fargo said. "We forecast a yield of roughly 2% by year-end 2021."

The appreciation in the dollar has forced traders to cut their short positions, adding further fuel to the greenback's climb, but some warn this short-squeeze ride is running out of road.

"Looking at the latest data, it appears that the room for the dollar to benefit from further short-squeezing has shrunk significantly," ING said.

The bullish bets on the dollar against the reported G10 currencies improved for a tenth consecutive week, with net shorts "now worth only 5.6% of open interest … but were as high as 19% in mid-January," ING added.

Looking ahead, the dollar is set for busy week of top-tier economic data, with the latest jobs report due Friday that could add to the evidence that the recovery remains on track.

"[N]onfarm payrolls are expected to rise 650k in March, the unemployment rate is expected to decline from 6.2% to 6.0%, and average hourly earnings are expected to increase 0.1% in March and 4.5% over the past 12 months," Stifel said in a note.

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